Restrictive Covenants Governing Employment
If you run a business, no doubt you've had a valuable employee leave for a competitor. It creates an unsettling situation. What happens if the departing employee begins contacting your customers? What if they tell their new employer inside information about how you make a product that gives your company a competitive edge? Most importantly, what options can you turn to prevent this kind of activity? The answer? Restrictive covenants.
Read more about Non-Solicitation Agreements- The Third Rail of Employee Mobility Law by employment attorney Thomas D. Rees.
What is a Restrictive Covenant?
Businesses compete daily to sell products and services. But they also compete on another level -- for people. Companies everywhere look to employ and invest in the most talented employees to compete and excel. Losing a key employee takes a business to its knees, especially for small and medium-sized organizations.
Unsurprisingly, companies want to protect that human capital. And here's where restrictive covenants enter the business world. So, employment contracts contain restrictive covenants to protect employers should a key employee leave to join a competitive business. The covenants help prevent employers from losing clients and having departing employees convey valuable inside knowledge or business strategies.
Restrictive covenants prohibit individuals from competing with their ex-employer for a certain period following their departure. They can also restrict the geographic area where an ex-employee may work. Above all else, however, they must be reasonable. Otherwise, courts will unilaterally reject them.
What Constitutes a Valid Employment Contract?
First, state laws govern the enforceability of restrictive covenants. And, as expected, those laws vary from state to state. For example, North Dakota, Oklahoma, and California don't allow non-compete agreements. Second, most states focus on the reasonability of the covenant's requirements.
A restrictive covenant must meet these requirements to be valid and enforceable in Pennsylvania and many states:
- The covenant must be ancillary to the employment relationship
- It requires adequate consideration
- The restrictive covenant safeguards an employer's legitimate business interest
- The restrictive covenant includes a reasonable duration and geographic area
Consideration requires that the employee receives something in exchange for signing the non-compete or getting the job. However, if an employer requires the employee to sign a restrictive covenant following employment, the employee must receive consideration, for example, a salary increase, promotion, or some other benefit.
The length of covenants may be as short as six months or as long as three years. Generally, courts uphold two-year time limits. That timeframe gives employers adequate time to replace an employee and defend against unfair competition. However, circumstances always determine the reasonableness of the timeframe.
With geography, a restrictive covenant may prevent the departing employee from competing in a small radius, a statewide radius, or even greater distance. For example, most medical practices use a mileage radius covering 80 percent of their patient base as the scope for geographic restriction on a departing physician.
Types of Restrictive Covenants
The most recognized restrictive covenant is a non-compete agreement. Corporations routinely use them when hiring employees. Typically, companies focus on these agreements:
Non-competes are the most restrictive type of covenant. It prevents former employees from working with competitors, especially within a specified geography and for a specific time. As mentioned, the concept of reasonableness applies to the terms of such an agreement. Nevertheless, non-competes can be valuable for top executives, salespeople, and individuals with access to essential information.
This covenant has similar provisions to a non-compete but specifically restricts employees from contacting customers, vendors, or other employees. Generally, the employee can work for a competitor with the caveat they cannot solicit their former employer's customers, vendors, or employees to gain a competitive advantage. In addition, it includes a specified timeframe for non-solicitation. Its benefit for an employee versus a non-compete is that they can work in the same industry.
For a more in-depth review of non-solicitation covenants, read Non-Solicitation Agreements - The Third Rail of Employee Mobility Law.
Non-disclosure prohibits the misuse of defined confidential information gained during the employee's tenure with the company. Examples include customer lists, trade secrets, unique manufacturing processes, product development initiatives, etc. Unlike other types of restrictive covenants, confidentiality provisions generally lack time limits.
Each of these most common restrictive covenants seeks to avoid competition in various forms and levels. You can read this article for even more information on restrictive covenants, The Seven Types of Restrictive Covenants.
What is Garden Leave?
One type of restrictive covenant worth further discussion here is garden leave. Employers use garden leave to prevent an employee from working at the company. At the same time, they restrict the employee from taking another position. As a result, employees spend their time pursuing hobbies like gardening—hence, the term garden leave. Salaries and benefits continue until the end of the leave period.
Garden leave is similar to a non-compete, where an employee can't work for a competitor for a specific timeframe following their departure. For example, the employer may fear that the employee could become uncooperative or negatively influence other employees. In addition, it limits the employee's contact with clients, so they can't persuade them to join them at their new company. It also takes them out of the game, so they don't have access to the company's latest activities.
Read this article, What is Garden Leave? for more information.
The Big Question: Are Restrictive Covenants Enforceable?
Pennsylvania courts generally find non-compete agreements enforceable if they meet the criteria presented above for duration, geography, and business interests. However, the Pennsylvania Supreme Court doesn't favor such contracts. Instead, it cites restrictive covenants as trade restraints preventing former employees from earning a living.
Consequently, PA courts scrutinize restrictive covenants in employment agreements to determine whether the restrictions imposed on employees are unreasonable. If not, they will limit them in favor of the employee.
You can read more here about restrictive covenants and their enforceability.
Our Employment Lawyers Can Handle All Your Employment Concerns
Employee mobility legal services require litigation skills and business law knowledge of the specific issue. Our employment lawyers have had extensive experience in injunction proceedings, enforcing restrictions for employers, and avoiding conditions for employees.
We work in federal and state trial and appeals courts in Pennsylvania and other regional states. In addition, our employment law attorneys handle matters before arbitration panels. We work hard to obtain quick, decisive, and workable results for our clients.
Our employment lawyers helped execute multi-state guides on restrictive covenants not to compete, trade secrets, the employee's duty of loyalty, and tortious interference with employment contracts. In addition, our employment attorneys have a working knowledge of federal trade secrets and computer fraud statutes. Finally, they understand the effect of social media usage on employee mobility.
If you're an employer, it makes business sense to have some restrictive covenants to protect your business from an employee leaving and moving to a competitor. If you'd like to learn more about enforcing a restrictive covenant or you're looking to enforce one, contact one of the employment lawyers at our Bucks County and Montgomery County law firm. Call 610.275.0700.